Investing.com -- The Federal Reserve Board on Thursday requested public feedback on a proposal aimed at reducing the volatility of capital requirements that arise from the Board’s annual stress test results. This proposal marks the first in a series of actions, following the Board’s announcement in December that committed to widespread changes to the stress test.
The Board’s stress test is designed to assess the resilience of large banks by estimating their potential losses, revenue, and capital levels under a hypothetical severe recession scenario. Due to the changing hypothetical nature of the test, the results vary each year, introducing volatility. These results partly determine the calibration of the stress capital buffer (SCB), which is a component of the capital that large banks must maintain to absorb losses.
The current proposal aims to address two areas. Firstly, it proposes averaging stress test results over two consecutive years to reduce the annual changes in the capital requirements resulting from the stress test. Secondly, the proposal suggests delaying the annual effective date of the stress capital buffer requirement from October 1 to January 1 of the following year. This change would provide banks with extra time to adjust to their new capital requirements. The proposal also includes targeted changes to streamline the Board’s data collection related to the stress test. These proposed adjustments are not expected to significantly affect overall capital requirements.
Later in the year, the Board plans to propose additional changes to enhance the transparency of the stress test. These changes include disclosing and seeking public feedback on the models used to determine the hypothetical losses and revenue of banks under stress. The Board also plans to ensure that the public can comment on the hypothetical scenarios used for the annual stress test before these scenarios are finalized.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.